Employers May Not Rush To Drop Health Coverage After All

Despite claims to the contrary, a insightful economic analysis suggests that it wouldn't be in most employers' business interests to stop providing health insurance when the main coverage provisions of the federal health overhaul kick in.

The work, done by researchers from the Urban Institute for the Robert Wood Johnson Foundation (a supporter of NPR), looks at all the factors that employers with more than 50 workers will have to weigh in deciding whether to continue to offer coverage or whether to pay a new "free rider" penalty and let their workers purchase their own coverage in the new marketplaces called health insurance exchanges. In those exchanges, those earning under four times the poverty level (about $80,000 for a family of four) would be eligible for federal subsidies.

Except for businesses that employ almost exclusively low-paid workers (those earning under 250 percent of poverty), it won't make economic sense to stop offering health coverage.

That's because many commentators who have predicted businesses would have an incentive to drop coverage and let workers go into the exchanges to get coverage have forgotten a key piece of the puzzle.

They've been assuming that it would be either about the same or slightly cheaper for the employer to pay the penalty (roughly $2,000 or $3,000 per worker, depending on the circumstances) than to offer health insurance. And that's true, as far as it goes. But, the researchers point out, "employers who drop workers' coverage but fail to increase employees' wages in order to maintain their overall compensation, will inevitably lose these employees to competitors."

As a result, many of those employers will have to both pay the penalties for not offering coverage and raise wages to make up for the reduced benefits packages, making the change financially unattractive in most cases.

That's why many other studies also predict little change in employer coverage after the key aspects of the law take effect. Assuming of course, they actually do take effect as scheduled.

You might remember last summer, the consulting firm McKinsey & Co. released a controversial (and methodologically creaky) survey of employers suggesting that as many as 30 percent would stop providing health insurance come 2014.

Now critics will charge that for better or worse, the McKinsey survey actually was based on asking questions of live human beings who work for actual businesses, while this latest study is based on microsimulation models.

But this new study has access to all the economic information (or at least as much as can be known at this point) that would weighed in making that decision, something not at the fingertips of most people who'd answer a survey.